Friday, 17 May 2013 11:55 AM
Investing in Wound Care’s Real Growth Drivers
The wound care market may not be the most exciting biotech niche on the surface, but the multi-billion dollar industry’s need for innovation has created an opportunity for smaller companies operating in the space. In this article, we’ll take a look at some of the industry’s dynamics and why investors may want to look towards smaller stocks for real growth.
Burgeoning Business for Majors
The wound care market is expected to reach nearly $21 billion by 2015, from $16.8 billion in 2012, according to research firm Kalorama Information. With seven million Americans suffering from chronic wounds, the market is expected to grow due to the aging U.S. population and ongoing proliferation of diabetes and other chronic illnesses.
Of course, the major beneficiaries of this growth are large companies like Johnson & Johnson Inc. (NYSE: JNJ), Smith & Nephew plc (NYSE: SNN), ConVatec and KCI. These companies make up about half of the overall market, providing traditional wound care technologies, even though many of these technologies lack clinical evidence of efficacy and cost-effectiveness.
Investors looking for established plays on the wound care space may consider investing in many of these names, but their large-cap size and slow innovation may translate to growth rates that underperform smaller and more cutting-edge companies. Moreover, the extensive research and development spending by these firms may equate to a favorable M&A environment.
Finding the Real Growth Drivers
Given the lack of efficacy and cost-effectiveness, there has been a lot of interest in new technologies that can improve wound care. Many of the major players mentioned above are investing heavily in research and development, while other large players like Bayer AG (OTC Markets: BAYRY) have also announced plans to enter the market.
“There is a very limited amount of well-developed information about how you deal with wounds,” said Dr. Gerald Lazarus in a WSJ Health Blog interview in April 2012. “We always want to focus on what’s best for the patient but with the runaway situation in health costs, there should be justification that the treatments being used have documented value.”
New technologies addressing these concerns have the potential to become the industry’s primary growth drivers. Already, GlobalData expects the negative pressure wound therapy market – a new treatment that uses special dressings and vacuum technology to speed wound healing – to double from $2 billion in 2011 to $4 billion by 2018.
Looking at Smaller Players
Many micro- and small-cap companies are actively developing products in the space, including Derma Sciences Inc. (NASDAQ: DSCI), Oculus Innovative Sciences Inc. (NASDAQ: OCLS) and American CryoStem Corporation (OTCQB: CRYO). By taking a wide variety of approaches, these companies could be developing the industry’s next generation solutions.
Derma Sciences’ advanced wound care products promote the topical absorption of micro-nutrients at a cellular level in order to promote healing in a moist and occlusive environment, while Oculus’ Microcyn® wound management products utilize non-cytotoxic and pH-neutral hypochlorous acid to supplement and enhance existing wound care solutions.
Meanwhile, smaller companies like American CryoStem are focused on the rapidly growing regenerative medicine space. By preserving adipose tissue from patients, the company aims to provide access to stem cells that can be used to effectively treat advanced and chronic wounds using the patients’ own body – a method that could prove to be most effective.
Emerging Role of Stem Cells
Wound healing requires a coordinated interplay among cells, growth factors and extracellular proteins, according to a January 2012 research paper studying the role of mesenchymal stem cells in wound repair. Stem cells can differentiate into various types of tissue, regulate immune response and inflammation and possess powerful tissue protective and reparative mechanisms.
American CryoStem, which stores patients’ adipose tissue, leverages this type of regenerative medicine and could revolutionize wound care. In fact, the company recently entered into an agreement with three leading research scientists at Rutgers to develop new cellular wound care therapies based on its autologous adipose-derived stem cells.
“Rutgers was the next logical step for development and expansion of our cellular therapy products,” said American CryoStem CEO John Arnone in a press release. “We are very proud to be collaborating with the state’s top bio-tech academic research institution and to be part of the global development of cellular therapies.”
In the initial stage of the collaboration, the scientists will identify, understand and publish their findings on engineered biomaterial interactions with adipose-derived stem cells, the company’s cell culture media, and the resulting tissue growth when used in the treatment of chronic or hard-to-heal wounds, such as diabetic and pressure ulcers.
Takeaway for Investors
The wound care industry may seem like it’s growing at an anemic pace, but its unmet need for improved efficacy and cost effectiveness has opened the door to competition. Larger players like Johnson & Johnson and new entrants like Bayer AG are investing heavily in R&D, which naturally opens the door to acquire smaller companies in the space with proven technologies.
American CryoStem, Derma Sciences, Oculus Innovative Sciences and other smaller innovators using regenerative medicine and various advanced technologies to improve wound care could become key drivers of the industry’s growth. Investors may want to keep a close eye on these stocks over the coming quarters, particularly as clinical data becomes available to help support efficacy claims.
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